National Security Advisor Jake Sullivan: U.S. Needs New Trade, Economic Consensus

The U.S. needs an industrial policy, and a shift away from the consensus view on global trade from the past, National Security Advisor Jake Sullivan told a gathering at the Brookings Institution on April 27.

“America’s industrial base had been hollowed out,” he told those in attendance. His speech was titled Renewing American Economic Leadership. “The vision of public investment that had energized the American project in the postwar years—and indeed for much of our history—had faded.  It had given way to a set of ideas that championed tax cutting and deregulation, privatization over public action, and trade liberalization as an end in itself. In the name of oversimplified market efficiency, entire supply chains of strategic goods—along with the industries and jobs that made them—moved overseas.  And the postulate that deep trade liberalization would help America export goods, not jobs and capacity, was a promise made but not kept,” he said.

Sullivan’s speech shows that the debate has changed in Washington on trade. While many in Congress and especially the Senate are still largely focused on expanding markets, globalist policies that rely on allied approval, it is clear that both parties have learned that making Asia America’s go-to manufacturing hub has had devastating consequences. It is not translating to the political, and both parties know it.

“America didn’t just lose manufacturing—we eroded our competitiveness in critical technologies that would define the future,” he said.

Sullivan often alluded to the key pieces of legislation signed into law by Biden – the CHIPS Act, the Bipartisan Infrastructure Law, and the Inflation Reduction Act, which gives tax incentives to build renewable energy projects, and manufacture the equipment – whether solar panels or wind turbines, EV cars or EV batteries, here at home. These were used as his examples of “industrial policy” designed to help U.S.-based manufacturing, and secure supply chains.

Those in attendance had mixed reactions, and most were not fans of battling China, or the U.S. turning inward. They also, by and large, did not want to escalate tensions with China.

Here are some examples:

Larry Summers, ex-Treasury Secretary, World Bank chief economist and Obama’s chief economic advisor:

“I was disappointed that the speech did not emphasize the central importance of importing low-priced goods. That is a substantial part of what determines the living standards of Americans. That is a substantial part of what determines the competitiveness of American producers. For example, we have 60,000 people working in the steel industry and 6 million people working in industries that use steel.”

[Prices did not rise because of tariffs. Section 232 steel tariffs began in August 2018. The NYSE Steel index was 1264 in September, falling to 1099 in December 2019. It fell further in 2020 due to Covid, and is up now due to lockdowns and record stimulus impacting global supply chains and the commodities trade.]

David Dollar, Senior Fellow and China expert at Brookings:

“The administration is using one instrument, industrial policy, to hit two targets: protect national security and bring back manufacturing jobs. By trying to hit two targets, each one is to some extent undermined. For national security: the Buy American provisions upset our allies and undermine the alliance of advanced democratic states. They also make the energy transition more expensive and hence slower. Limiting the subsidies for electric vehicles to ones with a certain amount of American content inevitably makes EVs more expensive and slows their adoption. Concerning the second target, generating manufacturing jobs in the U.S., the administration’s approach is incredibly indirect. It consists of subsidizing the build-up of capital stock through direct subsidies and, indirectly, through import protection with the hope that more capital stock will generate more jobs.There is no guarantee that there will be net manufacturing jobs.”

[The Inflation Reduction Act alone has led to billions of new investments and thousands of new jobs that did not pull from other sectors of the economy. BMW is building a new EV assembly line in South Carolina., which does not come at the expense of employment elsewhere. Layoffs happen all the time in a variety of industries, for a variety of reasons, including mismanagement. The net manufacturing jobs argument is weak because it means that if we lost 1,000 auto parts manufacturers, which is likely as autos go electric anyway, but gain 500 in EV battery manufacturing – instead of it being imported from Asia – that the policy has somehow failed.]

Josh Gotbaum, Economist, Brookings:

“These (export restricted) technologies being dual use also makes enforcing export controls (on China) more difficult. The administration can limit the transfer of some technologies to China only with the cooperation of other countries to prevent diversion. Russia’s ability to access certain chips despite sanctions is a reminder of the difficulties involved. Export controls are now taking place in a world with far more international trade. The world economy is much different today and the U.S. remains heavily trade dependent. That there’s no attempt to ‘decouple’ the U.S. and Chinese economies seems sensible since some critical materials are now available only from China. But Sullivan suggests a more complicated agenda, noting the need for the U.S. and its allies to bolster economic ‘resilience’ to avoid supply disruptions.”

Oren Cass, Director of American Compass and a Financial Times op-ed writer:

“It is disappointing that the Biden administration still refuses to apply its analysis properly to the challenge of America’s economic relationship with China, instead trusting that market forces will generate positive results. Sullivan characterized the China challenge in terms of national security, calling for a ‘small yard, high fence’ approach to economic restrictions. Because limiting military tech transfer and ensuring resilient supply chains are the issue, ‘we are for de-risking and diversifying, not decoupling.’ But even if China was to disarm tomorrow, credibly foreswearing any aspirations beyond its borders, its influence as an economic actor would remain deeply corrosive to American liberty and prosperity. Decoupling is essential. Our nation’s free enterprise system is incompatible with one dominated by state-owned, state-controlled, and state-subsidized competitors.”

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Sullivan also addressed steel. He said the U.S. and Europe are working on a policy that would restrict carbon-intensive steel production from its market. Most of that steel comes from Asia. U.S. steel is the least carbon-intensive as it relies heavily on recycled metals.

“The Global Arrangement on Steel and Aluminum that we’re negotiating with the European Union could be the first major trade deal to tackle both emissions intensity and over-capacity,” he said, naming China as the main culprit of the world’s steel glut.

But it came with a warning that the two sides might apply it to other sectors as well, something that may or may not be well received by American producers and other countries. “If we can apply it to steel and aluminum, we can look at how it applies to other sectors as well,” he said, without naming examples.

He added that the U.S. was committed to the World Trade Organization’s trade rules. “We (need to) ensure our competitors aren’t gaining an advantage by degrading the planet,” he said.